Foreign Currencies Effect on Stock Prices

Foreign Currencies Effect on Stock Prices

Finance 447 – Global Financial Management | Southeastern Louisiana

2016

For the time Period January 2016 to March 2016Austin Polk

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Executive Summary

For the time period January 4, 2016 to March 31, 2016, four companies from different

industries were analyzed to determine what effect foreign currency exposures had on the

company’s stock price. Among the four companies were two Multi-national Corporations

(MNCs), and two American Depository Receipts (ADRs). The United States based MNCs were

American Airlines and Activision Blizzard. The two companies were affected completely

different by foreign currencies. American Airlines had majority of of their foreign currency

from expense side of their income statement, and when dollar strengthened against their foreign

currency exposures it made their expenses look cheaper. However, due to global concerns they

were not able to fully benefit from the value of the dollar, so they only increased overall by

0.52%. Activision Blizzard, however, has foreign currency exposure on both sides of their

income statement. Meaning when the dollar strengthened, it caused expenses to look cheaper,

but it also devalues the foreign revenues. The strengthening of the United States dollar, along

with the firm-specific issues that Activision Blizzard faced throughout the period, caused them to

decline overall by 9.32%. The two foreign companies that were analyzed were Toyota Motor

and Nokia. Toyota Motor issues an ADR in the United States that is equal to two shares of

common stock within the company. The issue that hurt Toyota Motor the most was foreign

currency translation risk due to the value of the United States dollar appreciating against the

Japanese yen at the same time as the Japanese yen was depreciating against the United States

dollar. This caused foreign expenses to look very expensive because they were having to buy

more dollars to pay for the expenses, while at the same time having to use more yen to buy the

dollars. This caused an overall decrease of 12.47% over the time period. Nokia also issues an

ADR in the United States that is equal to one share of common stock within the company. The

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biggest impact on the ADR price for Nokia was the patent settlement between Nokia and

Samsung. Investors were expecting a better outcome that what occurred, and that coupled with

less than great financials caused the ADR to fall by 17.69% over the period. Some of these

companies had hedging programs in place to help mitigate the risk associated with foreign

currency risks, however, they did not always benefit from those hedging programs.

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Austin Polk

Danielle Lewis. Ph.D.

Finance 447-01

14 April 2016

Foreign Currencies Effect on Stock Prices

For the duration of January 2016 to March 2016, four different companies were analyzed

to see how their stock prices were affected by foreign currencies appreciating or depreciating

against the companies’ home currency. Among the four companies being analyzed there were

two Multi-national Corporations (MNCs) and two American Depository Receipts (ADRs). The

two MNCs were American Airlines and Activision Blizzard, both of which are based out of the

United States. The two ADRs that were analyzed were Toyota Motor, based in Japan, and

Nokia, based in Finland. All of the companies had firm-specific issues that affected their stock

prices over the course of this time period, as well as risks that were associated with foreign

currencies.

American Airlines (AAL) is one of the United States’ largest domestic airliners. Over

the researched time period, AAL was affected by global concerns, firm-specific issues, and

foreign currency fluctuations. Among the global concerns were the Zika virus scare (Lee, Will

American Airlines Stock Be Helped) and the terrorist attack in Brussels, Belgium in March (Lee,

American Airlines Stock Falls); both of which decreased the demand for travel in turn causing

the stock price of American Airlines to take a hit. Even with the demand for travel declining, the

overall change in the stock price was +0.52%. This overall change can be attributed in majority

to the firm-specific issues that took place. At the beginning of the period, American Airlines

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released the 2015 4th quarter earnings revealing record profits for 2015 year-over-year. Net

income from American Airlines increased from $2.9b in 2014 to $7.6b in 2015 for a total change

of +164%. Due to this increase in net income, earnings per share (EPS) increased from

$4.02/share in 2014 to $11.39/share in 2015 for a total change of +183%. The greatest increase

from 2014 to 2015 was the change in comprehensive income, which is the income that has not

yet been realized. In 2014, American Airlines lost approximately $2.6b regarding retiree

benefits causing a massive increase of +1,995% from 2014 to 2015 (American Airlines). The

increase in record-breaking earnings for American Airlines brought in investors, causing the

stock price to escalate throughout the period. Along with the record profits for 2015, the

currency exposures played a minor role in the overall rise of the stock price. American Airlines

is exposed to at least eight different currencies. Listed in the table below are the correlations

between currency values and AAL’s stock, using American Airline’s top five currencies, along

with their exposures.

AAL Euro Brazilian Real

Pound Canadian Dollar

Yen

Correlation 1 -.0098 -.5323 .3203 -.6018 -.4763Overall Change .52% -4.31% -10.24% 2.53% -6.75% -5.93%

Exposure Extent(Expense)

Total23.87%

18.85% 3.11% 0.85% 0.70% 0.36%

Exposure Extent(REVENUE)

N/A N/A N/A N/A N/A N/A

Long/Short OverallShort

Short Short Short Short Short

*All values are calculated using direct quotes for the United States dollar. Stock Price tracked using Yahoo Finance, and currencies tracked using OANDA.

Due to the lack of a hedging program, American Airlines benefited because of the strengthening

of the dollar, causing the fair value of hedging instruments for foreign currencies to lose value

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(American Airlines). The strength of the dollar in comparison to the currencies AAL is exposed

to, is slightly boosting their overall stock price. While there was some benefit to the currency

fluctuations, it is believed to be minimal. American Airlines is driven mostly by the domestic

market rather than foreign economic issues. The graph below shows the movement of American

Airlines in relation to the market index movement of the S&P 500.

The correlation between AAL and the S&P 500 is .8263, proving to be a relatively strong

relationship between American Airlines and the domestic market.

Unlike American Airlines, Activision Blizzard (ATVI) was not benefited from the

strengthening of the United States dollar against the different currency exposures. The overall

change in the stock price for ATVI was -9.32%. However, this decrease in stock price is not just

attributed to currency fluctuations. Activision Blizzard had some firm-specific issues throughout

the period that did not help counteract the currency risks. In November of 2015, Activision

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AAL vs S&P 500

American AirlinesS&P 500

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Blizzard announced its plan to acquire King Digital for approximately $5.9b by purchasing

shares for $18/share in different phases. Investors became worried when reports arose stating

that King Digital had lost 36% of their profits and 16% of their revenue in the fourth quarter of

2015. They were starting to believe that King Digital was not worth the $18/share. Naturally

this belief caused potential investors to grow concerned and apprehensive about investing during

that time (Rogers). Activision Blizzard posted their 2015 earnings, around the same time span,

that went against investors’ expectations and anticipations. Profits during the fourth quarter fell

by almost 56%. The day that Activision Blizzard released their earnings, their stock price fell

almost 8% (L.A. Biz). Activision Blizzard currently has a hedging program to help mitigate the

risk associated with foreign currencies. The currency forward contracts that they enter into helps

mitigate, but not eliminate the risk. Activision Blizzard adjusts for currency risks along with

gains/losses on hedging instruments within the statement of comprehensive income. In 2015,

they had a total loss of $330m based off of their currency exposure risk (Activision Blizzard).

The top five currency exposures and the extent of the exposures, along with the overall price

changes and the correlations of the currencies to the stock price, are located in the table below.

ATVI Japanese Yen British Pound

Australian Dollar

Euro Russian Ruble

Correlation 1 .6351 -.2962 .2797 .6289 -.1124

Overall Change -9.32% -5.93% 2.53% -5.9% -4.31% -1.25%


Total28.28%

26.17% 2.11% N/A 0.19% N/A


Total18.07%

3.64% 7.34% 2.66% 2.25% 2.18%


Short Long Long Long Long

*All values are calculated using direct quotes for the United States dollar. Stock Price tracked using Yahoo Finance, and currencies tracked using OANDA.

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The strengthening of the United States dollar in comparison to the currency exposures makes

expenses look cheaper; however, it also makes revenues look less valuable. These relationships

are an indication of how Activision Blizzard’s stock price is negatively affected by the

strengthening of the United States dollar causing the revenues from foreign countries to be

reduced which leads to the decline in stock prices. The correlation between Activision Blizzard

and the S&P 500 is 0.1169, which indicates that the relationship between the two is independent

of each other. The graph below shows this independent relationship between ATVI and the S&P

500.

Activision Blizzard does not seem to be driven by domestic market conditions, rather it seems to

be driven mainly by firm-specific issues along with currency risks.

Toyota Motor Corporation’s (TM) ADR price on the NYSE fell 12.47% during the

studied period. The ADR’s that were issued are equal to two shares of common stock in the

company. According to the company’s 20-F form on file with the SEC, Toyota Motor has a

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ATVI vs S&P 500

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hedging program in place; however, it only hedges against transaction risks and not translation

risks. In essence this means that they hedge in regard to actual cash flows, but they do not when

they are just converting overseas operations back into the Japanese yen. The Toyota Motor

website states that they have 53 overseas factories that are in 28 different countries (Toyota

Motor). Their foreign factories drastically help decrease transaction risks due to the foreign sales

coming from the foreign subsidiaries. These overseas factories do not help mitigate the

translation risks. Approximately 20.85% of Toyota Motor’s expenses come from foreign

countries, whereas only 5.51% of their revenues come from abroad. This adds an enormous

amount of translation risk to the company. The following table shows the top four currency

exposures, as well as the correlations between the ADR price and the currency fluctuations,

overall changes throughout the period, and the extent of the exposures to the different currencies.

TM United States Dollar

Euro British Pound

South Korean Won

Correlation 1 -.9207 -.7211 -.8856 -.8214

Overall Change -12.47% 5.95% 1.3% 8.77% 2.8%


Total19.05%

10.35% 7.43% 0.51% 0.76%


Total5.13%

4.83% N/A 0.30% N/A


Short Short Short Short

*All values are calculated using direct quotes for the Japanese yen. Stock Price tracked using Yahoo Finance, and currencies tracked using OANDA.

During the evaluated period, the United States dollar strengthened against the Japanese yen by

5.95%, causing the expenses to look more expensive because TM is having to purchase more

dollars in order to pay for the same amount of expenses. The relationship between the ADR price

and the values of the currency exposures relative to the yen, becomes clear after seeing the

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correlation between them. As the value of the dollar appreciates against the Yen there is

downward pressure applied to the value of the ADR, and the same is true for the other currency

exposures just to different extents. The largest exposure by far is the United States dollar.

However, the price of the ADR does not move in relation to the United States market. It is more

closely correlated to the Japanese market. The following graphs show the correlation of Toyota

Motor’s ADR price with both the Nikkei 225 and the S&P 500.

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TM vs Nikkei 225

Toyota MotorNikkei 225

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b. Correlation between Toyota Motor and S&P 500 (United States Market Proxy)

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The driving force behind the price of Toyota Motor’s ADR seems to be the Japanese market

conditions rather than the United States market conditions. The correlation between TM’s ADR

and the S&P 500 was -.18, whereas TM had a positive correlation of .77 with the Nikkei 225.

Toyota Motor’s stock price was adversely affected by the currency fluctuations during this time

period, by both the strengthening of the exposure currencies relative to the yen and the

weakening of the yen relative to the exposed currencies.

Nokia (NOK) is a foreign company based out of Finland that issues ADR’s in the United

States. These ADR’s are equal to one share of common stock within the company. During this

three month period, the price of Nokia’s ADR fell 17.69%, with the majority of this decrease

happening on February 1st. Since January of 2014, Nokia and Samsung have been in arbitration

over a patent dispute. On February 1st this dispute was resolved, and the outcome was not as

investors had expected. When reports of this unforeseen outcome came out, the price of Nokia’s

ADR plummeted almost 12%. Investors were hoping, that through the arbitration process, Nokia

would overtake their rival’s, Ericsson, patent licensing revenue of 1.2b euro (Bylund). Along

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TM vs S&P 500

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with the Samsung Settlement, Nokia had less than expected financials for 2015. Their net

income fell almost 29%, which caused EPS to plummet almost 29%. After reviewing the 20-F

form, it was determined that Nokia has a hedging program for both transaction and translation

risks. The hedging instruments are listed under the comprehensive income sheet within the 20-F

form. In 2015, comprehensive income fell over 50% due to their translation hedging

instruments; Nokia lost approximately 1.05b euro due to this foreign currency risk. After

realizing that Nokia has a hedging program, the correlation between Nokia and their foreign

currency exposures became clearer. All the information regarding Nokia’s foreign currency

exposures are listed in the table below.

NOK United States Dollar

Hong Kong Dollar

Japanese Yen

South Korean Won

Correlation 1 -.7601 -.7416 .4109 -.4949

Overall Change -17.69% 4.51% 4.57% -1.61% 1.06%

Exposure Extent(EXPENSE)

Total19.11%

14.01% 0.31% 1.26% 3.53%


Total34.13%

16.24% 8.13% 6.76% 3%

Long/Short OverallLong

Long Long Long Short

*All values are calculated using direct quotes for the European euro. Stock Price tracked using Yahoo Finance, and currencies tracked using OANDA.

Based off of the above table it is better understood that Nokia’s largest exposure is with the

United States dollar, and due to the hedging program that is in place, the correlation between

NOK and the value of the dollar could be significantly higher than it would be without the

hedging program in place. With this being said, the correlation between the two is still -.76,

which means that there is a strong negative relationship between the price of NOK and the value

of the United States dollar. With the extent of Nokia’s exposures, the appreciation of the dollar

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and other currencies against the euro causes expenses to look inflated, conversely it also causes

revenues to look inflated. However, with the hedging program in place, Nokia was not quite able

to reap the benefits of the currency fluctuations in 2015. After seeing the correlation between

NOK and the currency exposures, the relationship between NOK and the markets were analyzed.

NOK was compared to both OMX Helsinki 25 and the S&P 500. Below are the graphs

corresponding to these relationships.

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NOK vs OMXH25

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b. Correlation between Nokia and the OMX Helsinki 25 (Finland market proxy)

a. Correlation between Nokia and the S&P 500 (United States market proxy)

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After looking over the above graphs, the relationships between NOK and the market proxies can

be better analyzed. The correlation between NOK and their domestic market, OMX Helsinki 25,

is .30. The correlation between NOK and the S&P 500 is -.33. Nokia is not closely correlated

with either market, so it seems as if Nokia is definitely driven by firm-specific issues and

currency fluctuations, rather than being driving by the market conditions.

During these three months each company, both domestic and foreign, was faced with

issues that were company specific. They were faced with global turmoil that in some cases

shook their bottom lines. All of them, however, were affected in some way by the fluctuations in

the currencies that they were exposed to, whether the company had a hedging program or not,

they faced the risk associated with doing business globally. Some reaped the benefits of

strengthening currencies, whereas some suffered because of them. It is very clear to see that

foreign currency risk plays a colossal role in international business.

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NOK vs S&P 500

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Works CitedActivision Blizzard. Form 10-K. Washington D.C., 29 February 2016. Wed.

American Airlines. Form 10-K. Washington D.C., 24 February 2016. Web.

Bylund, Anders. Nokia Corporation Fell 15% in February. 11 March 2016. Web.

L.A. Biz. Activision Blizzard Earnings, Sales Disappoint. 12 February 2016. Wed.

Lee, U-Jin. American Airlines Stock Falls. New York, 23 March 2016. Web.

Lee, U-Jin. Will American Airlines Stock Be Helped. New York, 29 January 2016. Web.

Nokia. Form 20-F. Washington D.C., 1 April 2016. Web.

Oanda. Historical Exchange Rates. n.d. Web. 4 January 2016.

Rogers, Adam. Activision's King Digital Acquisition: a Big Impact on Users. 26 February 2016. Web.

Toyota Motor. Form 20-F. Washington D.C., 24 June 2015. Web.

Toyota Motor. Toyota Global Newsroom. 2 March 2016. Web. 1 April 2016.

Yahoo. Yahoo Finance. n.d. Web. 4 January 2016.

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Foreign Currencies Effect on Stock Prices

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